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Operating Agreements; The Basics

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Operating Agreements; The Basics

By JamieD
Published: November 5, 2010 Updated: December 6, 2013

Forming an LLC, or limited liability company, can be a very attractive option if you're looking for a business structure with increased personal protection and less formalities. Keep in mind that they do require some additional paperwork, including, an operating agreement. Here are the basics every LLC owner should know about operating agreements:

What is an operating agreement?

An operating agreement is one of the most important documents used by LLCs because it structures the business' financial and functional decisions. The purpose of the document is to govern the internal operations of the business in a way that suits the specific needs of the business owners. Once the document is signed by the members, it acts as an official contract binding them to its terms.

Why do you need an operating agreement?

  1. To protect the business' limited liability status: Operating agreements give members protection from personal liability to the LLC. Without that formality, your LLC can look too much like a sole proprietorship or partnership, jeopardizing your personal liability.
  2. To clarify verbal agreements: Even if members have orally agreed to certain terms, misunderstandings can still arise. It is always best to have the operational conditions of your business in writing so they can be referred to in the event of any conflict.
  3. To protect your agreement in the eyes of your state: State default rules govern LLCs without an official operating agreement. This means that each state outlines default rules that apply to businesses that do not sign operating agreements. Because the state default rules are so general, it is not good idea to rely on them for your agreement.

What does an operating agreement look like?

Operating agreements are contract documents that are generally between 5 and 20 pages long.

Tip: Try reviewing sample operating agreements* to get a general idea of what they should look like.

What is included in an operating agreement?

The functionality of internal operations are outlined in the operating agreement including:

  • Percentage of members' ownership
  • Voting rights and responsibilities
  • Powers and duties of members and managers
  • Distribution of profits and loses
  • Holding meetings
  • Buyout and buy-sell rules (procedures for transferring interest when members chose or in the event of a death)

Are LLCs required to form an operating agreement?

The requirement of an operating agreement depends on the state it was formed in. While many states do not require operating agreements, some, such as Missouri and New York, do. This information can generally be found on your secretary of state website.

Tip: It is unwise to operate without an operating agreement even though most states do not require a written document. Regardless of your state's law, think twice before opting out of this provision!

Where should operating agreements be kept?

Operating agreements should be kept with the core records of your business. They are not required to be filed, nor will they be accepted by your state.

Tip: Operating agreements should be kept confidential.

Discuss operating agreements in the community:

* This hyperlink goes to a non-governmental web site.

Message Edited by StuartR on 08-24-2009 04:57 PM

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Comments:

Is never too late to have a Business Lawyer draft your operating agreement and help you protect your business.
If we formed an LLC without putting an operating agreement in place, is it too late to make one? We are concerned that if a member decides to leave the LLC and we have no formal agreement in place, then the LLC will just dissolve. Do we have to have created an operating agreement by a certain date? Thanks!
That is a good question. The answer is: It's NEVER too late to put an Operating Agreement in place, although putting one in place can get harder over time because you need all owners to agree to it and sign it. Once everyone has the benefit of running the business for awhile, you never know if one or more partners will try "tough negotiations" to win some sort of concession. Your business doesn't automatically dissolve just because you don't have an Operating Agreement in place. Depending on the State your in, there will be default rules to handle most situations. The Operating Agreement allows you to overcome those defaults and have an "agreement between the members" in how the business is run. There are many templates on the Internet, but you will be best served by an attorney who can ask you questions and tailor the Operating Agreement to your company's specific needs. Good luck to you! Larry.
Phew. I am a new yorker and did not know I needed one of these. Does anyone know of a good place to get one free or do I have to fork up the dough at legalzoom or http://ellcoperatingagreement.com?
Although the LLC laws of the states are somewhat similar there is variation. This page contains links to information on the LLC laws for all 50 states. This link has been removed from public view. Please review the Community Rules of Conduct for more information.
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There are some interesting points in this post but I don’t know if I see all of them heart to eye . There is some validness but I will hold opinion until I look into it further. Good clause, thanks and we want more! Added to FeedBurner likewise. calculatoare second hand
Above it is mentioned that once an 'operating agreement' is signed it becomes binding. Allow me to ask a question :  Say an LLC in MO had been doing business for 5-6 years under the premise and understanding the operating agreement was signed by all parties, when indeed a signed copy can not be produced.  Although, 4 years into doing business under this LLC's operating agreement 3/4 of the partners decided to change their ownership to be placed in Trusts / PC which prompted amendments to be generated regarding the Operating agreement, whereby there 'are' a signed copies of the operating agreement based on these changes. My question is, due to the fact the operating agreement was amended and signed by all partners does this ratify the operating agreement ??? I have searched the internet for case study and MO statutes and can not find anything associated with this question. Can you lead me to a statute or case study that helps define this question ????  Thanks,Curious_of_Law
If ALL the owners agree, it's possible for them to ratify an Operating Agreement even if the original cannot be found. With that said, it's also dangerous. If you cannot find the original, my advice is to spend the money with an attorney and draft a new one so there is NO UNCERTAINTY and you have a document that everyone agrees with. I promise you, the money you spend on an attorney NOW with all the owners alive and agreeable will be CONSIDERABLY LESS than what you spend if one of the owners dies and the estate of the owner attempts to asset some right, dispute ownership percentages, or something else that is detrimental to the company and/or the remaining owners. Good luck to you! Larry.
Petrosianii - I'm glad you found this article helpful and thank you for the tips you provided from your own experience! I hope you'll continue to use the community as a resource as well as a place to share your ideas.

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